Transition economies have an initial condition of high human capital relative to GDP per capita, giving them high growth potential. In the model, at a good equilibrium a large number of children of well-educated parents take advantage of their family backgrounds and invest substantially in their own human capital. At a bad equilibrium, past educational achievements are wasted as children fail to build upon their parents’ achievements. Policies affecting the education system and the returns to human capital can be decisive in determining the outcome. The model provides a basis for distinguishing development economics from transition economics.
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